Difference between a Bull and Bear Market

Portfolio CVI: The model’s volatility, as measured by the Canterbury Volatility Index, is at CVI 23 (low risk).

Market Comment:
So what is a “bull” or a “bear” market anyway? You can ask ten different analysts, economists, or portfolio managers and most likely get just as many answers. To me, the difference between a bull market versus a bear market, or one that is in transition between the two, is much more about the potential risk than the predictability of return.

The level of risk, at a given point in time, is a moving target. Time is always moving forward, so liquid traded markets and securities move (fluctuate) on a real-time basis. As a result, financial securities will experience variable levels of risk, based on the ever-changing levels of supply and demand in the market place.

The most often quoted definition of a “bull market correction” is a 10% decline from the previous peak value. That 0% - 10% change in price represents normal, random fluctuations, which are the result of real-time trading that makes liquidity possible.

Some other generally accepted characteristics of a bull market are as follows:

Price volatility tends to be low and/or declining.

The current market price is higher than the 200-day moving average of prices.

The 50-day moving average is higher than the 200-day moving average.

The pattern of price changes has established a trend of successively higher highs in price followed by an orderly decline, but not lower than the previous low.

The chart below illustrates a period that exhibits the characteristics of a sustained bull market with limited risk. This environment will allow the Portfolio Thermostat model to dial up the percentage of the Global Equity Group without taking on substantial risk.

Source: AIQ

Bearish and Transitional market environments, in contrast, are unstable and can put investors at risk of substantial losses. Some generally accepted characteristics of a bear or transitional market are as follows:

A transitional or bear market are marked by erratic market fluctuations and volatility.

Bear markets tend to have successively lower lows and lower highs in price.

Transitional markets will maintain more of a trading range, with multiple “whipsaws” in price or false breakouts/breakdowns.

The chart below shows a period that exhibits the characteristics of a sustained transitional market with virtually unlimited risk. This environment will require the Portfolio Thermostat model to create a balance among the Global Equity ETFs and the Alternatives to Equities. The goal is to stabilize the portfolio and hold daily fluctuations to 1% - 1.25%, either up or down. A failed breakout could cause a whipsaw and would likely expose the markets to another wave of emotional selling.

Source: AIQ

Bottom Line:
We currently remain in a high-risk environment, which has much more risk than potential return. The market is furthermore extremely overbought, which is another factor contributing to the current risk. Nevertheless, the Portfolio Thermostat model continues to be in a position to limit the risk or even benefit from a sideways or declining market.

More About Tom Hardin

As Chief Investment Officer, Tom has more than 30 years of experience in the investment management industry and has a broad breadth of knowledge. He is known as an innovator, educator and has been revolutionary in the advancements of portfolio and risk management.

Every effort was used to provide accurate data and mathematical calculations to provide, what we believe to be, accurate results. Canterbury Investment Management, LLC, and its principal owners, make no guarantee of completeness or accuracy of data or calculations as well as conclusions of any statistical data or information contained in the simulation illustrated on this page. Past results or performance is in no way a guarantee of future results.